Range Resources (RRC, Financial), which is involved in oil and gas exploration and production, has been in my radar and I have maintained a bullish view on the stock after the correction in oil and gas stocks. With the company reporting its 1Q15 results, there are strong reasons to be bullish on the stock from a medium to long-term investment horizon. This article discusses the key positives in the results and the outlook for FY15.
For 1Q15, Range Resources announced a production growth of 26% to 1,328Mmcfe per day and robust production growth underscores the company’s operational excellence. As a result of the strong production growth, Range Resources clocked revenue of $463 million for 1Q15 as compared to $457 million in 1Q14. Even with lower oil and gas prices, Range Resources was able to clock revenue growth due to a strong hedging position.
For 1Q15, the company’s average gas equivalent realized price (including hedges) was $3.54/Mcfe as compared to $4.92/Mcfe. While the difference in realized price was 28% in 1Q15 as compared to 1Q14, excluding hedges, the difference would have been 55%. Therefore, the company’s strong hedged positions have delivered in terms of revenue growth and cash flow growth.
For 1Q15, Range Resources reported an operating cash flow of $211 million as compared to $181 million in 1Q14. The important point to note is that Range Resources has 85% of its remaining 2015 natural gas production hedged at a weighted average floor price of $3.77 per Mmbtu. Therefore, the company’s outlook for FY15 in terms of revenue and cash flow is likely to remain robust on strong hedging.
Besides the hedging factor and the strong production growth that is likely to continue in FY15, Range Resources also has an excellent liquidity position. As of March 31, the company had an existing $3 billion borrowing base in addition to the $2 billion commitment amount under its $4 billion bank credit facility. Therefore, funding strong growth is not a point of concern for Range Resources once oil and gas prices recover.
From stability in earnings perspective, I must mention here that Range Resources had an additional long-term sales agreement in 1Q15 and this has resulted in total LNG sales agreement to 200,000Mmbtu/day. With a strong sales visibility for natural gas, Range Resources is very well positioned to deliver decent growth and cash flow numbers. Therefore, from a credit perspective, Range Resources is in a comfortable footing.
For FY15, Range Resources is targeting 20% production growth and I believe that the company’s operating cash flow is likely to be in the range of $700-$800 million. I am mentioning this because the capital expenditure for FY15 is targeted at $870 million and the OCF numbers imply that the investments can be largely funded through internal cash flows. In other words, I expect no meaningful increase in debt for Range Resources in FY15.
In conclusion, Range Resources is a good stock to own and the company is likely to deliver strong results due to good hedges. In my view, investors can still accumulate Range Resources at these levels with a medium to long-term investment horizon. Given the company’s financial flexibility, I expect strong production growth driven by high investments once oil and gas prices recover.
